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Piggy Rounds Part II: Why Some Large VC Funds Are Doing More Seed Deals

In May, I speculated several large VCs were changing their strategies after seeing more large seed checks from funds that usually enter at A or B rounds. These “piggy rounds” usually left little room for other institutional investors, in contrast to traditional seed rounds which may include several funds collaborating. My particular POV is that piggy rounds, just like party rounds, are risky choices for most founders (and have my own obvious bias in this statement). Four months later, wanted to update the “piggy round” hypothesis with some additional data around large fund motivations.

1) Large Funds Are Chasing Potential Outliers Earlier

The large funds – and by large I mean $250m+ who usually enter at A or B rounds – that have been most active in piggy rounds are doing so to chase potential outliers earlier. By “outliers” I mean companies they perceive as having the potential to scale very quickly in a success case. Often these funds are attempting to build out a reputation or gain exposure to a new vertical. For example, let’s say that a fund isn’t especially well-known for their consumer investments. Accordingly, if a consumer startup hits escape velocity, this fund likely won’t have a shot at winning the A round. So by necessity they’re willing to write a larger check earlier at seed, even if there’s a reasonable probability the investment goes to zero (the ole’ ‘you can only lose 1x your investment but the upside is unlimited’). Semantically, these funds might say they’re not doing seed rounds, instead taking the company ‘straight to A,’ but the motivation and implications are the same.

If you’re one of these funds, it’s probably the right strategy in the nearterm, although I think greatest risk is that you’re ‘winning’ these deals but end up applying your later-stage POV to these early stage companies. For entrepreneurs, you’re removing a degree of optionality very early in your existence since large funds have outcome goals that might be more restrictive than the full set open to a company backed by angel/seed investors. And for seed funds like ours, it definitely drives valuations up somewhat since large multistage funds tend to be ownership percentage sensitive more so than price sensitive.

2) Larger Funds Buying Up Early to Outbid Other Funds Later

Ok, this is really inside baseball but kind of canny and I’m starting to see more of it. Here the later stage fund writes a substantial ($~500k) check quickly into the seed round, not necessarily being the only/lead funder, but definitely different than the ~$50-100k exploratory seed checks we saw from these guys in 2011-2012.

So what’s the goal? To be in a position to outbid competitors come the A Round by offering a very high valuation. Their earlier ownership stake allows the fund to dollar cost average into a more realistic total valuation. Previously the $50-100k checks were about information/relationship first mover advantage but this strategy is about cost leverage.

We believe our fundamental strategy is strong – being partners of conviction for a startup, focused on leading seed financings and leaning in proactively where we can help. That said, we will likely increase the size of our second fund slightly in anticipation of “lead checks” being more often ~$700-$1m (as part of $1-$2.5m rounds). Also while we often collaborate with multistage funds in seed rounds, we are most focused on helping the founders end up with the best partners for their particular situation. We haven’t – and won’t – chase valuations and round size increases, especially when we believe they’re being set by an investor with motivations that may differ from ours and the founders.